Was electricity passed through by a commercial landlord taxable as rent?

Subject

Pass Through Charges for Electric Utilities

Plain-English summary

The landlord's electricity pass-through was not taxable rent when the landlord had already paid sales tax to the utility and billed the tenant separately at the same or a lower price. Monthly estimated operating-expense installments followed by a year-end actual-cost reconciliation were sufficiently separate under the lease.

Calling the charge "Additional Rent" did not change that result. But any markup or administrative charge above the landlord's electricity cost was taxable as rent and was also subject to the 2.5% gross receipts tax identified in the advisement.

The Department limited this treatment to previously taxed electricity. Other pass-through charges, including common-area maintenance and insurance denominated as rent and required for occupancy, remained taxable rental consideration.

For tax collected in error, the tenant had to receive a refund from the landlord first. The landlord could then seek a Department refund or take a credit within 36 months, supported by proof of utility tax paid, tax collected and remitted from the tenant, and the refund to the tenant.

What this means for you

Commercial landlords should separate at-cost electricity reimbursements from rent and other operating expenses, avoid markups if claiming this treatment, and preserve utility bills, invoices, payment records, tax returns, and customer-refund evidence.

Common questions

Did the lease label control? No. The charge could remain nontaxable even when the lease called it rent.

Was an electricity markup exempt? No. The excess and any administrative charge were taxable rent; the advisement also applied gross receipts tax to the markup.

Did the rule extend to common-area maintenance or insurance? No. The Department expressly kept those mandatory pass-through charges within taxable rent.

Who refunded tax paid in error? The landlord refunded the tenant first, then claimed a refund or credit from the Department with supporting records.

Citations and references

• Fla. Stat. §§ 212.031(1)(c), 203.01, 213.35, and 213.22
• Fla. Admin. Code r. 12A-1.014(1), (3), (4), (6), and (7)
• Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So. 2d 540 (Fla. 3d DCA 1984)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-066

Original ruling text

Dec 15, 1994

Re: Technical Assistance Advisement 94(A)-066 Sales and Use Tax - Pass Through Charges for Electric Utilities Section 212.031, F.S. Rule 12A-1.014, F.A.C. Parties: XXXXX (herein the "Tenant") XXXX (herein the "Landlord")

Dear :

This response is in reply to your October 7, 1994, petition for the Department's issuance of a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S. Your petition regards the referenced matter and parties. The Department has carefully examined your petition and finds it to meet the criteria set forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA. Therefore, the Department is hereby issuing the requested TAA.

DISCUSSION OF FACTS

Your request imparts the following information pertaining to the matter under advisement herein:

"Pursuant to previous correspondence received from the Department of Revenue (i[.]e. letter dated August 26, 1994, included herein) this letter is a request for an official Technical Assistance Advisement in order to obtain the state[']s clarification of TAA 90A-069 (November 1990) relative to sales tax on electricity. Specifically, please provide a written response regarding whether sales tax should be assessed on the electricity portion of annual operating expenses as they are billed to the tenant on a proportionate share basis.

"Enclosed is a copy of a lease for office space executed by the [Tenant] as well as a reconciliation statement

identifying the various operating expenses passed through to the [Tenant]. The actual electricity expense incurred by the building is identified without mark up' and it ismeasured at the landlord's master meter'. Based on TAA 90A-69 and the information contained therein, it is our understanding that sales tax should not be assessed on the electricity portion of the operating expenses billed annually to tenants occupying the property. Therefore, we have applied for sales tax credits with the [Landlord] for the [Tenant's] proportionate share paid in error based on the `Revised Billing', also included herein.

Careful examination was made of the Lease Agreement (the "Lease") submitted for analysis. Article 2.2 of the Lease, entitled "TENANT'S Share of Basic Operating Expenses.", provides in part the following terms and conditions relevant to the issue under advisement herein:

"TENANT shall pay to LANDLORD as Additional Rent hereunder the TENANT'S proportionate share of Basic Operating Expenses as determined below plus applicable sales tax thereon.

"(a) The term Basic Operating Expenses' shall mean the operating expenses of the Property and all expenditures by LANDLORD to maintain the Property and such additional facilities in subsequent years as may be determined by Landlord to be necessary in accordance with sound and reasonable practices for facilities of a like kind and character. All operating expenses shall be determined on a cash basis in accordance with generally accepted accounting principles which shall be consistently applied. Such operating expenses shall include all expenses, costs and disbursements of every kind and nature which LANDLORD shall pay or become obligated to pay because of or in connection with the ownership, operation and maintenance of the Property, including, but not limited to, the following:.... "(3) Cost of all utilities for the Property, including cost of electricity, water, lighting, hearing, air conditioning and ventilating.... "(c) TENANT shall pay TENANT'S Proportionate Share of the

total annual Basic Operating Expenses incurred by Landlord during each calendar year...."

REQUESTED ADVISEMENT

Specifically, you endeavor to receive the Department's advice regarding the following:

"Please confirm that sales tax should not be assessed on the electricity portion of `Additional Rent'. Also, please provide the procedures and any information necessary for the [Landlord] to submit their request for refund or credit of the sales tax paid from the state."

DISCUSSION OF LAW

The court in Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So.2d 540 (Fla. 3 DCA 1984), considered a fact pattern wherein:

"[The lessor] had twice paid sales taxes on the consumption by its tenants of electricity received through a single master meter; first, when it itself paid those amounts after being billed by the power company, and again when it transmitted the same taxes after being reimbursed by the tenants."

The court affirmed the hearing officer's findings that the landlord did not collect double tax from its tenants, but rather had twice paid sales taxes on consumption by its tenants of electricity passed through a single master meter.

In application of the Omni decision, the Department takes the position, in the instance where commercial premises are served by a single or master meter and the proportionate cost of the electricity paid by the lessor, and upon which the lessor has paid sales tax, is passed through to a tenant, and the lessor is simply reimbursed by the tenant for its actual electrical consumption, that such electricity billed the tenant is not a taxable element of the payment for renting, leasing, letting, or granting a license to use real property. Thus, in such

instance, the electricity costs borne by the tenant shall not be included within the taxable total rent or license fee charged for the occupancy or use of real property as provided in s. 212.031(1)(c), Florida Statutes. This position will be held irrespective whether the lease or license agreement designates such proportionate electricity costs billed the tenant as part of the rent or license fee.

With respect to the refund or credit of tax paid in error, Rule 12A-1.014, F.A.C., provides in relevant part the following:

"(1) All dealers who are covered by the provisions of the sales and use tax law must keep records, as provided in s. 213.35, F.S., as created by section 6, Chapter 88-119, Laws of Florida.... "(3) Any dealer who makes taxable sales to nontaxable persons, or refunds taxes paid to any purchaser, or pays any tax in error for which he later claims a refund or credit shall keep internal records to support such sales. "(4)(a) When any dealer refunds the tax paid by a purchaser, the Department of Revenue will refund such tax if application therefor is made in writing within 36 months from the date of payment of the tax to the state. The application for refund must state in clear and convincing terms the grounds for refund. "(b) Any dealer who is entitled to a refund of taxes paid to the Department of Revenue may, in lieu of applying to the Department for a refund, take credit for such amount on any subsequent report filed within 36 months of the date on which the dealer remitted the tax to the state. Such credits must be supported by schedules attached to the tax report and if, in the discretion of the Department, said credit is improperly taken, it may be disallowed by the Department within thirty-six (36) months of the date on which such credit is taken by the dealer.... "(6) Whenever a dealer credits a customer with tax on returned merchandise or for tax erroneously collected, he must refund such tax to his customer before his claim to the State for credit or refund will be approved. "(7) A taxpayer who has overpaid tax to a dealer, or who has paid tax to a dealer when no tax is due, must secure a

refund of the tax from the dealer and not from the Department of Revenue...."

CONCLUSIONS OF LAW

The undersigned does hereby affirm that the Department's interpretation and application of the Omni decision to the instant facts as represented does yield a finding that the electric utility charges which are billed to the Tenant by the Landlord are not subject to sales tax provided that: (i) the landlord has paid sales tax to the utility provider on the electricity; and (ii) the utilities billed by the Landlord to the tenant are separately stated on the Landlord's invoice to the Tenant at the same or lower price as that billed by the utility company to the landlord. The Department considers the procedure and methodology embodied in the Lease, whereby the operating expenses (including electric utilities) are paid by the tenant to the landlord in monthly installments based on an estimate and reconciled at year end based on actual cost, to sufficiently satisfy the requirement to separately state the pass through charge for electric utilities. The exempt character of the pass through charge for electric utilities is not lost as a result of the denomination of such charge as rent by the terms of the Lease. However, you are alerted to the fact that in the event the electric utilities are marked up on the pass through, then the residual amount of charge to the Corporation in excess of the landlord's cost for such electric utilities is subject to tax as rent. This includes any amount designated as an administrative charge on the pass through of the electric utilities. Moreover, the amount of any mark up of the electric utilities would also be subject to gross receipts tax at the rate of 2.5% pursuant to s. 203.01, F.S.

We further point out that the Department has not adopted a position of expanding the scope of the Omni decision to embrace any other pass through charges such as common area maintenance, insurance, etc. In short, the scope of Omni has been confined to the single issue at bar, sales tax on the pass through of utilities (previously taxed). Therefore, the various other pass through charges which are denominated by the Lease as "rent", the nonpayment of which constitutes a default under the terms

and conditions of the Lease, are taxable as mandatory rental consideration payable as a condition of occupying the premises.

Regarding the procedure to be followed by the Landlord in obtaining a refund of or taking credit for the sales tax it refunds to the Tenant on the pass through of electric utility charges, the provisions of Rule 12A-1.014, F.A.C., above, must be complied with. As provided in subsection (7) of the rule, the Tenant must secure the refund from the Landlord, not the Department. As provided in subsection (6) of the rule, the Landlord must refund the tax to the tenant as a prerequisite of claiming a refund or credit of the tax. Lastly, as provided in subsection (4)(a) and (b) of the rule, the Landlord must claim the refund or credit within 36 months of remitting the tax to the state in order to fall within the three year statute of limitations. The method for claiming a refund is for the Landlord to complete an Application for Refund (Form DR-26) and to submit said form to the Department together with supporting documentation. The supporting documentation should include: (i) proof that the Landlord paid tax to the Utility Company on the electric utilities; (ii) proof that the Landlord collected tax from the Tenant on the pass through of the electric utilities and remitted said tax to the Department; and (iii) proof that the Landlord refunded the tax to the Tenant on the pass through charge for electric utilities. The method for taking credit is for the Landlord to include the amount of credit on line 6 (Refunds and Lawful Deductions) of its Sales and Use Tax Return (Form DR-15). The amount of credit cannot exceed the tax liability reported on the return. Residual credit may be carry forward and utilized in a succeeding month so long as the month is within the 36 month statute of limitations. The return must be supported by schedules showing the same information described in items (i) through (iii), above. The Landlord's records must contain documentary evidence (i.e., utility bills, cancelled checks, sales tax returns, etc.) proving such items.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized

above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 17959